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Today’s FOMC decision to cut rates by 25 basis points, along with the introduction of reserve management operations, was widely expected—at least by me, and consistent with what I had been highlighting ahead of the meeting. It seemed clear that the Fed needed to prevent reserves from falling further, as the decline had been putting pressure on the overnight funding market, which we have been discussing here for months. Instead of freezing assets, they are trying to stabilize reserves, which is the more pressing issue. Perhaps things were worse behind the scenes than on the surface.

The Fed clearly felt it had to act, announcing roughly $40 billion in bill purchases this month. In reality, this mostly offsets the week-to-week fluctuations we typically see on the balance sheet and may help lift reserves slightly. But the move feels a bit late, and the way they are implementing it almost comes across as a half-baked approach.

The $40 billion does not appear to be a static amount. It sounds as though we will be learning the specific figures on the ninth of each month, at least until April, when the operation is expected to end. It is probably not a coincidence that the operation concludes around the same time Jay Powell is set to step down as Fed chair. It may even have been structured intentionally so that a new chair can come in and implement whatever policies they believe are appropriate.

In a way, it seems Powell is trying to avoid letting the situation continue deteriorating under his tenure and is positioning himself to step aside before anything unfolds that could make the current environment worse.

However, the real proof will come when we see how the overnight funding market actually behaves on a day-to-day basis—where SOFR trades and where volumes settle—and that will ultimately determine whether this operation is truly successful. In my view, $40 billion is unlikely to be enough to offset year-end funding pressures, and it will probably not be sufficient in January to meaningfully lower the rate pressures we have been seeing in a short period of time. But again, the results will speak for themselves as we monitor these dynamics day to day.

Luckily, this comes at the perfect time for the $80 billion in Treasury settlements on Monday, 15 December.

Anyway, Oracle (ORCL) is getting smashed, down 10% today, after its cloud revenue missed estimates and the company noted that CAPEX was rising to $50 billion from $35 billion. I guess that means tomorrow we will be on CDS watch for the AI names once again.
 

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